The Hightower Report

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The market saw a significant long liquidation break from Monday’s highs and fell as much as 12.3% in just three trading sessions. This leaves the market in an oversold technical condition but the follow-through selling certainty confirms that a major top is in place. Weakness in the US dollar and ideas that roasters may emerge to provide some support could spark a corrective bounce today. Open interest has been declining since mid-July as short-covering was the foundation for the last leg higher to 12 1/2 year highs and open interest declined sharply in the past few sessions which could be an indication that speculators are liquidating longs. The small and large trader combined net long position reached nearly 50,000 contracts in the last COT report which is considered overbought and a general sense that the world and US economies may weaken along with the recent uptrend in the US dollar has fund traders second guessing the “buy and hold” commodity play which has been a popular theme in recent months. December coffee was unable to recover from Tuesday’s huge losses, and extended the sell-off even further to the downside during the session yesterday. At this point, the market has moved over 18 cents lower in just three sessions. A 30% production increase over last year’s levels from a major coffee growing state in Colombia, in spite of disease outbreaks, had led some to lift overall projections for Colombia coffee production this season. Carryover coffee stocks in Vietnam for the upcoming crop year are expected to be larger than last season’s levels, in spite of heavy exports during July. Vietnam officials are still expected to move ahead on their stockpiling plan in which up to 500,000 tonnes (or near 50% of this season’s production) would be held off of the market for up to six months to support producer prices. The coffee market faces a significant (7-8 million bag) world production surplus this season which should help alleviate tightness in the cash market. ICE exchange stocks were down 5,867 bags yesterday to 2.022 million with 27,179 bags pending review.

TODAY’S GUIDANCE: Look for selling resistance to emerge near 174.20 and 176.90 for December coffee with 161.10 as next downside objective.

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There is still no technical sign of a top and the market continues to find support from declining exchange stocks but the fundamentals seem to be slowly shifting to the bear camp. Open interest has been declining since mid-July as short-covering may have been the foundation for part of the recent move to new 12 1/2 year highs. After reaching highs earlier in the week, December coffee could not sustain upside momentum and lost ground for the second day in a row yesterday. This upcoming season’s coffee production from El Salvador will be over 43% above last season’s levels. Recent rains in growing areas of Vietnam may improve expectations for this season’s coffee crop. Forecasts for Brazilian production areas call for temperatures to remain well above levels that could cause a damaging frost. Daily exchange stocks fell to another 10-year low yesterday, down 1,600 bags to 2.044 million bags with 21,389 bags pending review. The market is in a transition period going from extremely tight supply of higher quality coffee and a relatively tight supply of all coffee on July 1st to a much easier supply period ahead. World production is expected near 133-135 million bags for the 2010/2011 season which is up from 120 million this past season with a bumper crop from Brazil as the key reason for the supply increase. Exports in July from Central America, Mexico, Colombia, Peru and the Dominican Republic totaled 1.976 million bags, down 7.6% from last year. This pushed October to July cumulative exports to 20.048 million bags, down 10.8% from the previous season.

TODAY’S GUIDANCE: While stocks are tight at the beginning of the 2010/11 season, the bumper crop out of Brazil and the increasing production out of Colombia should eventually bring an expanding supply of deliverable grade coffee on the world market. Short-term support comes in at 176.50 and 174.50 with 187.45 as next chart count “if” the uptrend continues.

TODAY’S MARKET IDEAS: Watch for a sign of a top soon and a move through support could spark an increase in speculative long liquidation selling. If the market turns down from here, 169.75 will be initial strong support.

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The market managed to hold key support on the break Tuesday and while there appears to be a significant top in place, it will be important for the bears to see this support (165.65 September coffee) to be taken out soon. If not, the reversal top and set-back on Tuesday will just look like a correction in the bull trend. September coffee regained upside momentum and moved well away from the recent lows yesterday but prices remain far below Monday’s 12 1/2 year highs. Tight near-term supplies of Colombian coffee have underpinned the market’s recovery, as they point towards the historically low levels for certified deliverable stocks at both the ICE and the LIFFE exchanges. Weather forecasts for Brazilian production areas remain too warm to cause any frost damage and the crop is more than 50% harvested. One of the primary reasons for the surge higher into the August 2nd peak was declining exchange stocks and this is still a potentially supportive force as higher quality deliverable coffee is still in tight supply and in many cases such as Colombia is still priced above the board. A major coffee retailer in the United States raised list prices for several of their brands by an average of 9% and this is higher than normal push in prices and could slow demand but commercial retailers are just adjusting to the higher world price. ICE certified Arabica coffee stocks fell by 1,029 bags to 2.079 million, with 15,879 bags pending review.

TODAY’S GUIDANCE: September coffee resistance comes in at 173.30 and 175.25 with support at 165.65. A decisive move under support will turn the trend down and leave 156.55 and 150.65 as downside objectives.

TODAY’S MARKET IDEAS: We have a slight bearish bias but outside market forces remain strong and exchange stocks are tightening.

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The idea that that exchange stocks will continue to tighten both at the ICE and the LIFFE continues to underpin this recovery rally, but the reality of huge upcoming crops from South and Central America may be putting a blanket over the coffee market. September coffee was able to hold much of last week’s recovery rally but was unable to extend prices outside of the recent trading range on Monday. Exports from Vietnam during July were up nearly 70% from last year’s levels, but that may be due to LIFFE futures reaching price levels high enough to encourage producer selling. Weather forecasts for Brazilian production areas continue to predict temperatures well above levels that could produce a damaging frost. ICE certified Arabica coffee stocks on July 26th fell by 820 bags to 2,130,903 bags, with 300 bags pending review. Recent revisions to 2009/10 global coffee production forecasts are reflected by tight near-term supply levels, which have helped to lift prices well off of their recent lows. The inability of September coffee to move past this month’s highs, however, may be due to a realization that supplies will be much more plentiful later on in the year. Weather remains favorable for an active harvest in Brazil and there is still no sign of threatening cold weather.

TODAY’S GUIDANCE: Unless there is a dramatic change in the supply/demand outlook, September coffee will likely have difficulty getting past the 170.00 level. Another test of last week’s lows may be on the cards if the upside momentum runs out of steam. Support for September coffee comes in at 163.70 with 167.70 and 169.80 as next resistance levels.

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While the coffee market has been trading in relatively large ranges over the past few session, prices have kept gravitating back towards the 164.00 level in September coffee. The recent delivery issues with the London contract have kept prices at elevated levels, but there has been little in the way of direction during the past two weeks or so. The market started yesterday’s session under heavy pressure but was able to recover a large portion of those losses by the end of trading. Recent dry weather conditions in Colombia and Vietnam are likely to have a negative impact on this season’s production. However, temperatures still have not come close to reaching freezing levels in Brazilian growing areas. Tight deliverable stocks for both the NY and London contracts underpinned coffee prices over the past month. However, expectations for large increases in Brazilian and Colombian production this season hang over the market. The upcoming supply surge may prove to be the key factor in September coffee heading lower, as production from Colombia and Central America should ease the deliverable stocks situation once supplies start flowing northwards. There may be further upside left for September coffee, but the recent trading range has been posting higher lows and lower highs. With the shadow of huge production from South America hitting the markets soon, another move back towards the high may prove to be as high as September coffee will trade for awhile.

TODAY’S GUIDANCE: Key support for September coffee comes in at 156.85 with 164.40 and 167.20 as resistance. While yesterday’s initial sell-off was unable to follow through to the downside, there are still too many negatives on the fundamental side to feel that the chances for another run at last month’s highs are any more than remote at best.

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European debt issues resurfaced as a key negative force for stock markets and commodity markets around the world as there is a fear that the weakening economies in Europe will spread to China and other parts of the world to slow growth prospects. Risk avoidance was also a key force. Near perfect weather for the Brazil harvest in the forecast has added to the bearish tone with above normal temperatures and dry weather seen in the next week. September coffee continued to move further away from last week’s highs, as general pressure throughout the commodity markets turned yesterday’s slide into a rout. The upcoming harvest of this season’s crop from Brazil will keep the market under some pressure for an extended period, particularly as there has been no damaging frost as yet to diminish expectations that this crop will be huge. There are indications that the crop harvest is nearly 1/3rd complete. In addition, a major brokerage house has lifted their worldwide forecast for next season’s crop by over 11%, up to 140 million bags. Officials in Costa Rica increased their forecast for next season’s coffee production by close to 12%, up to 1.66 million bags. ICE certified coffee stocks for the day were down 1,525 bags to 2.228 million with zero bags pending review. Stocks at the end of June 2009 were 3.6271 million bags. Brazil exports through June 28th reached 1.262 million bags which is down from 1.765 million in May for the same time frame.

TODAY’S GUIDANCE: While the chart pattern looks weak, it appears to be a high risk sell at present with deliverable stocks still declining and Colombia coffee prices still near 70 cents over the board.

TODAY’S MARKET IDEAS: Resistance comes in near 167.45 for September coffee with support at 159.45 and 154.15.

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The market is still operating under the negative technical influence of the June 21st reversal. The jump in open interest, however, is seen as a bullish technical development this week and shows a willingness of traders to buy in spite of the overbought technical condition. Tightness in deliverable supply and the premium of high quality coffee above the futures are factors which may be forcing more commercial buyers into long positions in futures. This set-up is a temporary but positive set-up and could continue to provide underlying support. Weather is near ideal for harvest in Brazil with dry conditions expected in the next week and no sign of any cold threatening weather. September coffee was able to recover from early weakness yesterday, but could not hold onto the recovery and ended the day with a small loss. Increased sales and higher prices from Vietnam recently have led to projections of export coffee shortages for than nation during September and October which is just ahead of their new crop harvest which is expected to be larger than last year. ICE certified coffee stocks for the day were up 1,451 bags to 2.251 million with zero bags pending review. Stocks at the end of June 2009 were 3.6271 million bags. Colombia has had two poor crop seasons in a row and they have been trading at a significant premium to the futures for much of the past two years, but it took tightening deliverable stocks in London to force the market higher.

TODAY’S GUIDANCE: The market is staring at a very large Brazil crop which is expected to drive world production well past world consumption for the coming year. However, Brazil is not deliverable and higher quality Colombia and Central American coffees still hold a stiff premium. A minor bounce in deliverable stocks yesterday should be a concern for the bulls but the increase was small and traders will continue to monitor deliverable stocks movement for direction. New highs for the move (if this occurs) would negate the reversal and leave 169.60 as next upside target. However, Monday’s reversal leaves the market vulnerable to some back-and-fill action with first good support all the way back at 153.55.

TODAY’S MARKET IDEAS: Stand aside for now.

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Cold weather in Brazil this week came early in the cold season ahead of a weekend, and this was enough to spark a significant short-covering surge in coffee yesterday. Buying continued overnight to drive September coffee to the highest level since January. With the large base of support under the market and rising open interest, the technical action is very strong and this could attract additional buying. Normally, commercial sellers would be much more active but the Brazil coffee harvest is just picking up steam and Colombia production is just starting to improve so spot supply is still tight. Indonesia cash markets are also strong and there are some concerns that commercial traders may have oversold the crop and this has added to the support. July coffee made a strong move to the upside yesterday, moving well beyond its recent trading range and almost reaching last week’s highs. Updated weather forecasts from Brazil are calling for cooler weather in several production areas over the weekend, although those projected temperatures are not quite low enough to cause frost damage. While the damage done by Tropical Storm Agatha to coffee growing areas in Guatemala and El Salvador has not been fully quantified by government officials, predictions for a heavy tropical storm season this year may mean that this uncertainty may be repeated over the next few months. The International Coffee Organization believes the 2009/10 production will be 120.6 million bags which is down 5.9% from last year and down from their estimate in April of 122 million. Demand for 2009 is pegged at 132 million and 2010 at 134 million. However, production for the 2010/11 season is pegged at 133-135 million. ICE certified coffee stocks for the day were down 18,537 bags to 2.268 million with 4,920 bags pending review.

TODAY’S GUIDANCE: Earlier than normal cold weather, earlier than normal damage from tropical storms and tight spot supply is helping to support and the turn to more bullish technical action adds to the positive tone. Close-in support for September coffee is at 139.90 and the 50% mark of the December to May break is at 142.45. The next key resistance is at 145.05.

TODAY’S MARKET IDEAS: Fundamental news could turn sour into July but the technical action remains a bullish force for now.

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Colder than normal weather in the forecast for early next week has helped support the market recently. While there are no damaging temperatures in the forecast, the market is also finding some support from the idea that cold weather is here early this season. While a frost could certainly cause significant damage to the crop, Brazil production is expected to come in near 55.3 million bags (USDA attache) which is up 23% from last year. Brazil is far and away the world’s largest producer. Absorbing this crop will be a difficult task and prices may need to stay low enough to spark strong demand. July coffee was able to recover from early losses yesterday, but could not find enough strength to make another run at this week’s highs. Weather forecasts for Brazilian production areas call for colder weather in the early part of next week, but the chances for a damaging freeze remains small.

Early reports from Guatemala indicate that many coffee production areas in that nation were spared heavy damage from Tropical Storm Agatha. On top of a bumper Brazil harvest, the improving production outlook for Colombia and Vietnam for the coming season has added to the bearish supply tone. It will take time to determine damage in Guatemala and Honduras but many traders seem to believe the impact on world production will be minor. ICE certified coffee stocks for the day were down 14,154 bags to 2.304 million with 4,920 bags pending review.

TODAY’S GUIDANCE: Colder than normal temperatures in Brazil have encouraged shorts to exit and may have sparked some increased coverage from end users but without frost damage in the forecast early next week, we could see some long liquidation selling. Open interest was down 1,311 contracts to 136,232 and this is down from 138,579 contracts on May 20th when the market appeared set to break-out to the downside. Close-in resistance for September coffee is at 137.80 and 138.15 with 135.60 and 134.65 support. Look for an eventual move under the May lows.

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Financial market uncertainty seems to be growing and this is not a good set-up for the coffee market. Brazil is expected to be harvesting a bumper crop in the next few months with most traders looking for 51-55 million bags and some estimates pushing 60 million bags as compared with the official Brazil forecast near 47 million bags. There is some short-term tightness due to a lack of high quality coffee in Brazil and Colombia but this tightness is expected to ease soon and the new crop will saturate any short-term demand. The surge higher in the US dollar should serve to push potential buyers to the sidelines and encourages longs to exit. July coffee was able to overcome a stronger Dollar to post a small gain for the session yesterday with an inside trading session. Big trade estimates for the Brazilian harvest continue to dampen sentiment for the market, particularly as those estimates are running well above government forecasts. Although the crop will be harvested over the next few months, the Brazilian crop will begin the period in which it is most susceptible to frost. The short-term forecast, however, remains bearish with warmer and dry weather just ahead which is ideal for harvest. The COT report from Friday showed the combined spec trader held a net long position of 9,171 contracts (large and small combined) which was down 3,388 contracts in just one week. The long liquidation trend is seen as a short-term negative force. The USDA attache in Vietnam believes the 2010/11 crop will be up 7% this year to 18.73 million bags from 17.5 million last year and 18 million the previous season. ICE certified coffee stocks for the day were down by 1,050 bags to 2.352 million with 0 bags pending review.

TODAY’S GUIDANCE: Without help from the weather, the coffee market looks poised for another leg down. Outside markets are negative and this could spark more speculative long liquidation selling.